IN IT FOR THE LONG HAUL
Unlike in previous booms, the many oil companies now flocking to the Permian Basin are making significant investments in the area, suggesting success there could be 'new normal'
The county roads off U.S. 285 near the Texas border are a gateway to a different world — one New Mexico has never seen before.
After sand-hauling semis and full-size pickups turn past a dozen colorful company signs onto one remote road, they’re greeted by a multitude of oil
facilities immediately dotting the landscape. To the left, a bulldozer digging trenches for a pipeline. To the right, a saltwater disposal facility. Up ahead, a fracking pond.
And that’s just the beginning. It’s the towering figures off in the distance that most embody what makes this oil boom different from previous ones: three oil rigs standing in a row, drilling the type of horizontal wells that have allowed the state to more than double its production over the past five years.
Welcome to New Mexico’s section of the Permian Basin, a region so prolific that if the area itself were its own nation, it would be a larger oil producer than every OPEC nation except Saudi Arabia and Iraq.
“The shale oil and gas boom has the opportunity — and many will claim it has already — to really transform the global market,” Staale Gjervik, president of XTO Energy, a subsidiary of Exxon Mobil,
said at an energy summit near here Thursday. “And Carlsbad is where? It’s really in the center of that transformation.”
The massive shale formation is changing the economic and political landscape, both close to home and across the globe. Not only has New Mexico’s portion given the state unprecedented revenue, the basin as a whole — which also includes a large swath of West Texas — has allowed the U.S. to reduce oil imports and given it geopolitical leverage it never could have imagined.
As the main driver of U.S. oil production growth, the Permian has helped the country become the largest producer in the world. That has allowed the U.S. to stop other countries from buying Iranian crude and impose sanctions on Venezuela’s oil industry without the missing supply causing prices to spike higher.
And while oil producers and the media have historically shined a brighter spotlight on the Texas side of the basin, New Mexico’s portion has some geological advantages that can make it even more attractive, leading major oil companies to recently announce large expansion plans in Eddy County.
But as with any boom, there’s an allimportant question: How long will it continue?
New Mexicans, who saw their state revenue devastated by plummeting oil prices only three years ago, might be wary to believe the rapidly increasing production levels are here to stay.
Yet oil companies, industry analysts and local officials are unequivocal that while production growth may slow, output will continue to increase from current levels.
“In my view, the pace will be constant for the foreseeable future,” said Allen Davis, Chevron’s former operations superintendent for the Delaware Basin portion of the Permian. Allen left the company earlier this year and became Eddy County’s manager this month. “Pick your number — 10 or 20 or 50 players in the basin — they have long-term plans.”
Companies flock to Carlsbad
The sheer number of energy companies descending upon the city of Carlsbad — and what they’re doing after they arrive — could ease doubts.
Last week, at an annual energy summit hosted by the city’s mayor, a performing arts center was packed so tightly with tables, chairs and booths that hundreds of attendees could barely walk down the aisles to get to their seats.
Banners featuring the logos of dozens of oil companies sponsoring the event hung on the walls, while attendees heard speeches from six major oil companies, Gov. Michelle Lujan Grisham and even former Dallas Cowboys defensive tackle Randy White.
Companies announced significant investments, reiterated they’re setting up local offices and promised they’re in it for the long haul, which would be different from previous times when they could easily curtail operations if prices fell.
Occidental pointed out it plans to open a 60,000-square-foot office in the Carlsbad area next year.
ConocoPhillips has a new office building in nearby Loving, while XTO has bought 47 acres in an industrial park to build a new regional headquarters.
“We’re going to be here for a while,” Babatunde Cole, president and general manager of Occidental’s Permian Resources unit, said at the summit.
Gjervik of XTO told the audience his company has almost 10,000 people working in the Permian, and its production in the basin has increased more than 20 percent to nearly 300,000 barrels a day since last year.
“We’re focused on establishing a long-term operation in the Permian,” he said. “We have plans to grow — really big plans.”
Better technology
Why are these companies so eager to come now? That answer points to another couple of reasons this boom could be more long term: technology and geology.
Southeastern New Mexico has been producing oil for a long time — since the 1920s, in fact. Traditionally, operators drilled conventional, vertical wells, which are drilled straight down into the earth.
In the early part of this decade, operators began to incorporate hydraulic fracturing and horizontal drilling. The latter allowed them to access formations that were previously unproductive or unreachable and to increase production rates by covering a much larger surface area.
In the beginning, those techniques were expensive. But recent technology has allowed operators to save time and reduce costs while also boosting output.
“We can produce one of the most competitive barrels of oil in the world,” said Gayle Burleson, senior vice president of business development for Concho Resources.
Operators can now drill horizontal wells in less time, and the laterals have become even longer — with many wells extending two miles, even three miles out.
Those were the types of wells being drilled by those three rigs, operated by Chevron, off Whites City Road near the Texas state line.
And there are many more. In fact, the majority of wells today in southeastern New Mexico — more than 80 percent, according to the U.S. Bureau of Land Management — are drilled horizontally.
“In 2012, there was a boom because oil was $100 a barrel,” said Chris Walls, supervising petroleum engineer at the Carlsbad Field Office for the BLM, which leases parcels of land to oil and gas operators. “Now, the price is stable and half of what it was, but there’s increased activity because of the advancements in technology.”
As evidence, Walls pointed out that New Mexico has about the same number of active rigs today as it had in 2012 — it had 108 as of Friday — yet its oil production almost tripled from around 85,000 barrels a day that year to about 249,000 barrels a day in 2018, according to the U.S. Energy Information Administration.
Geology on its side
In addition to cost, the Permian has geology on its side, and that’s particularly the case in the Delaware Basin section of the Permian, which straddles the New Mexico-Texas state line south of Carlsbad.
Parts of the basin have more geologic strata than other shale areas in the U.S. Because these formations are stacked on top of each other, geologists and operators often refer to the area as a “layer cake,” giving horizontal drillers more places to extract oil in the same parcel of land.
“The Permian is a completely different animal,” said Sarp Ozkan, director of energy analysis at Enverus Market Intelligence. “The area where Lea and Eddy counties meet with the Texas state line has one of the best economics in the country.”
Even New Mexico state economists, traditionally cautious about overstating the potential of a boom, are talking about a “new normal” for oil production, saying oil prices would have to drop below $38 to discourage drilling.
Five years ago, break-even costs were much higher, around $55 per barrel, Ozkan said.
The optimism of the economists from the legislative and executive branches is significant because they know too well the pain of having to cut forecasts amid plummeting oil prices — they did that in 2016.
“The forecast would suggest we’re at the start of a new plateau, that looking backward is not indicative of where we’ll go in the next five years,” Stephanie Schardin Clarke , the state’s taxation and revenue secretary, said at a meeting with state lawmakers last month.
There are always risks
Of course, nothing is ever certain in the commodities market, and there are still risks to continued growth in the Permian.
The perennial one is the price of oil, which is volatile and changes due to unpredictable factors such as hurricanes, OPEC decisions, the trade war and geopolitical developments across the globe. Even though prices would now have to fall further in order to hurt production in the Permian, it could happen.
“If we think volatility is going to go away, we’re dreaming,” said Jim Peach, a New Mexico State University economics professor emeritus who often speaks at oil conferences and state revenue meetings. “We could easily see a drop in oil prices.”
There’s also the possibility of a recession, which some forecasting agencies see as increasingly likely to happen in 2020.
But there are also concerns more specific to the industry. First, some companies in the Permian have encountered problems drilling too many wells too close together, which can lower productivity.
Second, investors have been pushing companies to focus less on growth and more on returning cash to shareholders. As a result, some don’t have as much money to spend on operations as before and will likely slow down capital expenditures, Ozkan said.
“If you’re spending less money on drilling and completion costs and maximizing cash flow, it makes it harder to grow production at the same pace as before, definitely,” he said.
This, Ozkan said, is likely why the number of active rigs in Texas has actually dropped by 95 over the past year, said Baker Hughes.
‘The whole world knows’
That hasn’t happened in New Mexico, but it could, Peach said.
“We’re probably going to see production issues in the Texas portion,” he said. “To think we won’t be affected by that is almost inconceivable.”
Forecasts do show a slowdown in the Permian.
According to one estimate by commodity investment fund Goehring & Rozencwajg, output in the basin will increase by another 2 million barrels per day and peak around 6.5 million barrels per day in about 10 years.
The CEO of Pioneer Natural Resources, an exploration and production company in the Permian, forecast last month that the basin would reach 8 million barrels a day at a “much slower pace” and would not be growing past 2025.
“I am lowering my expectations of the Permian,” CEO Scott Sheffield said on a conference call.
But slowing growth doesn’t mean a decline in production. Even if the basin reaches production levels of 6.5 million or 8 million barrels per day, that’s still a lot more than the current rate of 4.4 million.
“That distinction is very important,” Ozkan said. “Just because activity isn’t growing, that doesn’t mean volume is going to fall.”
And so, for now, the frenetic activity south of Carlsbad shows no signs of abating, and the area seems poised to make an even bigger mark on global energy markets.
“When I started working in Midland [Texas] 31 years ago, people asked, ‘Why the Permian? It’s on it’s last legs,’” said Burleson of Concho. “People don’t ask me, ‘Why the Permian?’ today. People know. The whole world knows.”